Completed 06 Sep 2016 04:50 PM HKT Disseminated 07 Sep 2016 09:27 PM HKT Asia Pacific Equity Research 07 September 2016
Overweight Previous: Not Rated Fosun Pharmaceutical -H 2196.HK, 2196 HK Fully Integrated Healthcare Player with Price: HK$23.90 Underappreciated Pipeline; Assume coverage with Price Target: HK$28.00 OW
We assume coverage of Fosun Pharma-H with an OW rating and HK$28.00 PT – China from OW rating and Dec-15 HK$35.80 PT prior to NR designation – given its Healthcare integrated healthcare platform, fast-growing hospital network, optimized AC Isabella Y. Zhao, CFA pharmaceutical product portfolio through R&D and further upside potential from (852) 2800-8534 M&A. Trading at 15x 2017 P/E, we believe valuation does not reflect its full [email protected] growth potential. Joanne Cheung (852) 2800-8596 Fully integrated business model with synergies: Fosun Pharm is a premium [email protected] healthcare giant with business covering all of the value chain. We project a J.P. Morgan Securities (Asia Pacific) Limited healthy 16.5%/17% top/bottomline organic CAGR, 2015-2018, in line with street consensus, given: 1) increasing synergies and leverage through all Price Performance 28 business segments; 2) rapid expansion of hospital network; 3) faster ramp up of medical devices such as Do Vinci surgical robot, IVD regents etc. 4) 24 HK$ international markets expansion; 5) further upside from potential M&A. 20
Accelerating hospital expansion: Fosun is a pioneer in China’s large and fast- 16 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 growing private hospital market, supported by its proven track record of 2196.HK share price (HK$) acquisitions. Fosun has total 3,018 beds in operation. We expect the number of MSCICNX-HLTH (rebased) YTD 1m 3m 12m beds to rise by at least 20% CAGR by acquisition of both private and public Abs 11.7% 28.8% 18.0% 4.4% hospitals. Rel 6.2% 22.4% 8.2% -11.4%
Evolving R&D pipeline: Fosun spends 5% of pharma sales on R&D, above industry average of 2-3% and has more than 172 pipeline projects with the industry’s most complete portfolio of biosimliar drugs and high entry barrier generic drugs; all supporting long term growth potential, in our view.
Valuation Our Dec-17 DCF-based PT is HK$28.0, implying 24% upside potential, or 17x our 2017 P/E. We believe Fosun deserves multiple expansion on its accelerated R&D development & upside from overseas acquisitions. Risks: 1) higher than expected tender price cut, 2) failure to gain from M&A transactions, 3) delayed or failure of pipeline.
Fosun Pharmaceutical - H (Reuters: 2196.HK, Bloomberg: 2196 HK) Rmb in mn, year-end Dec FY12A FY13A FY14A FY15A FY16E Company Data Revenue (Rmb mn) 7,278 9,921 11,938 12,502 14,579 Shares O/S (mn) 2,379 Net Profit (Rmb mn) 1,564 1,583 2,113 2,460 2,801 Market Cap (Rmb mn) 48,978 EPS (Rmb) 0.80 0.71 0.92 1.06 1.21 Market Cap ($ mn) 7,331 DPS (Rmb) 0.25 0.32 0.34 0.39 0.44 Price (HK$) 23.90 Revenue growth (%) 13.1% 36.3% 20.3% 4.7% 16.6% Date Of Price 05 Sep 16 EPS growth (%) 30.3% (11.5%) 30.3% 15.6% 14.0% Free Float(%) ROCE 2.9% 4.7% 4.5% 4.6% 5.1% 3M - Avg daily vol (mn) 2.13 ROE 13.5% 11.0% 13.2% 14.2% 14.4% 3M - Avg daily val (HK$ mn) 42.62 P/E (x) 25.8 29.1 22.4 19.3 17.0 3M - Avg daily val ($ mn) 5.5 P/BV (x) 3.0 3.0 2.8 2.6 2.3 MSCICNX-HLTH 146.86 EV/EBITDA (x) 57.5 34.4 29.9 24.6 20.6 Exchange Rate 7.76 Dividend Yield 1.2% 1.5% 1.6% 1.9% 2.1% Price Target End Date 31-Dec-17 Source: Company data, Bloomberg, J.P. Morgan estimates. Price Target (HK$) 28.00
See page 33 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
www.jpmorganmarkets.com Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Key catalysts for the stock price: Upside risks to our view: Downside risks to our view: • Quarterly earnings beat • Unexpected early approval of human insulin • Unfavorable government policies on prices of healthcare • Winning tenders in major provinces for • Better penetration in China market of Alma products products and services. key drugs and sales ramp up new products • Hospital services acquisition yields more synergies than • Failure to gain from any future M&A in terms of yield • Approval and launch of human insulin expected synergies and growth. • Major M&A in the hospital services sector • Much better than expected sales performance from • Difficultly in exiting minority investments due to products due to tenders. unfavorable market conditions.
Key financial metrics FY15A FY16E FY17E FY18E Valuation and price target basis Revenues (LC '000) 11,938,243 12,502,163 14,578,588 17,023,790 Our Dec-17 price target of HK$28.0 for Fosun H shares is based on DCF valuation. Revenue growth (%) 20.3% 4.7% 16.6% 16.8% EBITDA (LC '000) 1,605,294 1,813,440 2,201,400 2,641,424 EBITDA margin (%) 13.4% 14.5% 15.1% 15.5% Tax rate (%) 12.8% 14.9% 15.0% 15.0% Net profit (LC '000) 2,369,839 2,870,661 3,268,415 3,733,775 EPS (LC) 0.92 1.06 1.21 1.39 EPS growth (%) 30.3% 15.6% 14.0% 14.2% Revenue mix in 2016E DPS (LC) 0.34 0.39 0.44 0.51 BVPS (LC) 8.7 9.5 10.9 12.1 Operating cash flow (LC '000) 686,576 1,353,589 3,494,094 3,158,479 Free cash flow (LC '000) (432,861) 118,053 2,525,094 2,227,479 Interest cover (x) 3.9 3.9 4.7 5.6 Net margin (%) 19.9% 23.0% 22.4% 21.9% Sales/assets (X) 0.3 0.3 0.4 0.4 Debt/equity (%) 97.7% 96.7% 85.0% 86.2% Net debt/equity (%) 30.7% 37.9% 23.1% 16.0%
ROE (%) 11.5% 12.4% 12.7% 12.8% Key model assumptions FY15A FY16E FY17E FY18E Hospitals acquired 5 5 5 ASP cut for drugs 5% 5% 5% Manufacturing segment margin 15.2% 15.4% 15.6% Source: Company and J.P. Morgan estimates. Source: Bloomberg, Company and J.P. Morgan estimates. Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates Sensitivity to FY17E FY18E FY17E FY18E EPS (LC) FY17E FY18E 1ppt increase in GM 2.8% 3.8% 2.5% 3.0% JPMe old na na 0.5ppt increase in selling cost -3.9% -9.1% -3.5% -7.0% JPMe new 1.39 1.57 5% change in investment gain 0.0% 1.6% 0.0% 1.6% % chg na na 5% increase in Sinopharm profit 0.0% 1.6% 0.0% 1.5% Consensus 1.40 1.55 Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan estimates. Comparative metrics CMP Mkt Cap P/E (x) EV/EBITDA (x) P/BV (x) YTD LC $Mn FY16E FY17E FY16E FY17E FY16E FY16E Stock perf. FOSUN PHARMA-H (NC) 23.9 7,986 17.6 15.1 25.4 21.3 2.3 10.0 8.3 SHANGHAI FOSUN-A (NC) 23.56 7,985 18.2 16.1 25.5 22.0 2.6 10.3 2.0 BAIYUNSHAN PH-H (NC) 20.4 5,993 16.2 14.7 24.7 22.6 2.3 8.6 (7.1) GUANGZHOU BAIY-A (NC) 7.71 6,017 22.2 18.3 14.3 12.1 4.6 2.0 (1.1) CSPC PHARMACEUTI (NC) 13.88 1,492 35.8 31.2 22.5 16.7 5.1 2.9 55.7 SHANG PHARM -A (NC) 21.65 8,029 15.7 14.2 11.1 10.0 1.6 12.9 31.7 SHANGHAI PHARM-H (NC) 25.71 5,992 21.6 20.0 23.8 21.3 3.4 8.7 (15.1) SINO BIOPHARM (NC) 5.3 5,066 19.1 16.9 10.2 9.0 4.0 1.6 (24.5) Source: Bloomberg; Price as of 09/02/2016
2 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Investment summary Shanghai Fosun Pharmaceutical Group is a Shanghai based company engaged in R&D, manufacture, Shanghai Fosun Pharmaceuticals is an integrated healthcare service company which distribution and retailing of operates in all the verticals of the pharmaceutical industry including drug and healthcare products. The group’s medical devices development, manufacturing & sales; hospital services; and principal products include drugs for malaria and liver inflammation; pharmaceutical distribution (through its stakes in Sinopharm). It is a clear example of gynecological diseases as well as a healthcare ecosystem. As of 2015, 71% of Fosun’s revenue came from diabetes. The company owns ~32.1% Pharmaceutical manufacturing, and Healthcare services accounted for 11%. Fosun's of Sinopharm, the largest medical product distributor in China. By strength is its strong R&D team and its continued heavy investment in development entering into a strategic collaboration of new products. As of now, it has 172 products in its pipeline, especially in Bio- with Chindex and taking major stakes similar and Biologics segment. in two private hospitals, Fosun has also extended its services to hospital the services sector. The hospital service segment is expected to grow at the highest rate in China primarily due to the Chinese government’s push to expand hospital coverage in the Revenue breakdown by business country. Fosun, being one of the first entrants in this market, made its debut by segment (2015) collaborating with Chindex, a premium private hospital chain, in 2012. After that Healthc Others Fosun continued to expand and expects to achieve a CAGR of 20% in 2016-2018 in are (non Diagnosservice tic core) terms of the number of beds by acquisition, which we have not yet priced in. Fosun s 0% product11% s and is also a leader in the Medical devices business with its proprietary Da Vinci surgical medical robotic system. Apart from all these upsides, Fosun is also expanding internationally. device 18% Pharma For example, it acquired Alma in Israel in 2013 and Gland Pharm in India most Pharma ceutical ceutical s recently, which creates upside from cooperation in R&D cross selling and distribut manufa ion and cturing distribution channel expansion overseas. It has also ramped up its efforts to acquire retail 71% 0% high gross margin businesses and expand its business offering in the pharmaceutical segment. Source: Company data
Figure 1:Shanghai Fosun Pharmaceutical – Revenue and Figure 2: Shanghai Fosun Pharmaceutical – EBIT over growth rate 2012-2018E revenue 2012-2018E
Rmb Mn Sales YoY Rmb Mn EBIT EBIT Margin 36.3% 13.1% 13.2% 25,000 40% 3,000 12.5% 14% 11.2% 35% 2,500 10.0% 12% 20,000 11.8% 30% 8.2% 10% 2,000 15,000 20.3% 25% 8% 16.6% 16.8% 1,500 16.3% 20% 2,606 6% 13.1% 10,000 19,803 1,000 2,227 15% 1,821 4% 17,024 1,473 14,579 1,192 11,938 12,502 10% 500 1,114 2% 5,000 9,921 594 7,278 5% 0 0% 4.7% 0 0% 2012 2013 2014 2015 2016E 2017E 2018E 2012 2013 2014 2015 2016E 2017E 2018E Source: J.P. Morgan estimates for FY16E to FY18E, Company data for FY12-FY15 Source: J.P. Morgan estimates for FY16E to FY18E, Company data for FY12-FY15
3 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
1H16 results takeaways 1) 1H16 sales & profit grew by 17% YoY and 15% YoY, respectively: Pharma sales grew by 20% YoY, of which its cardiovascular portfolio was up 48% Y/Y, CNS up 26%, metabolism and GI up 13%, anti-infective up 31%, oncology up 22%, and APIs/intermediates up 19% YoY. Sales of its 19 major products (with sales more than Rmb100mn each) grew by 26% YoY in 1H16. Gross margin expanded by 300bps YoY to 53.3%, thanks to the faster growth of high margin products such as You Di Er and You Li Tong (>100% growth). 2) Healthcare service business will continue to grow. Hospital service sales grew by 12% YoY in 1H16. Now Fosun has 3,018 beds in operation in Fuoshan, Yueyang, Xuqing, Wenzhou, Xuzhou, Hefei, Taizhou, Yulin and Qingdao. According to management, the business will expand in 1st tier cities – e.g. Shanghai and Beijing – to tap on high-end customers and will establish specialist clinics for blood dialysis and gynecological examinations, in addition to its existing focus on general-purpose hospitals in 2nd/3rd cities. 3) R&D expenses on innovative drugs will increase. Currently, innovative drugs and generic drugs accounted for 30% and 70% of total R&D expenses. Management expects R&D for innovative drugs to increase and will reach a 50:50 basis. Total R&D expenses will also be >5% of its pharma sales to maintain the company’s competitiveness. As of August, Fosun obtained eight production approvals and 10 INDs (Investigable New Drugs). Novel drug furuitinib (or SAF-189s) has moved into combined Phase 1-2 for ALK-positive NSCLC, while HLX07, bevacizumab, and cetuximab are cleared to commence human trials. Fosun has the most complete portfolio of biosimilars in China that are going through comparison studies with reference products. 4) Major new products won most tenders in 1H16. According to management, as major new products won most tenders, revenue from new products have grown significantly in 1H16. New products like You Li Tong and You Di Er have seen strong revenue growth of >100% y/y, as have exported products to Africa which grew >30%. 5) Acquisition of Gland Pharma Limited, a key to the world. Gland Pharma develops and manufactures generic injectables in therapeutic areas of antibiotics, oncology and cardiology and distributes them in more than 78 countries. It is the one of the largest global players in this market. Management expects more corporate resources sharing between Gland Pharma and Fosun in future, and Gland Pharma’s expertise and business know-how will upgrade the company's pharmaceutical R&D business as well as accelerating its overseas expansion. The company will introduce c10 insulin products via Gland Pharma to India where regulation on pharmacists is less stringent; they expected to generate Rmb1-2bn revenue. Also the company will introduce c20 products of Gland Pharma to China, each product is expected to generate >Rmb100mn revenue. In the near term, they will look for acquisition opportunities in US and Europe while solidifying their business in China, according to management.
4 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 3: Fosun vs MSCI China Healthcare Forward PE – Healthcare stock de-rating on slower industry growth outlook & tender price cut pressure
Fosun (2196 HK) MSCI China Helathcare Index
35
30
25
20
15
10 12 13 13 13 14 14 14 15 15 15 16 16 13 13 13 14 14 14 15 15 15 16 16 ------Jul Jul Jul Jul - - - - Jan Jan Jan Jan Mar Mar Mar Mar Nov Sep Nov Sep Nov Sep Nov May May May May ------9 9 9 9 - - - - 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9
Source: Bloomberg Figure 4: Fosun Forward PE chart
Forward PE (2196.HK) Mean +1 STD
-1 STD +2 STD -2 STD
33 +2 STD, 29.43
28 +1 STD, 24.38
23 Mean, 19.32
18 -1 STD, 14.27 13 -2 STD, 9.22
8 12 13 13 14 14 15 15 16 13 13 13 13 14 14 14 14 15 15 15 15 16 16 16 ------Jul Jul Jul Jul - - - - Jan Jan Jan Jan Mar Mar Mar Mar Nov Sep Nov Sep Nov Sep Nov May May May May ------9 9 9 9 - - - - 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9
Source: Bloomberg
5 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Investment Positives
Fully integrated healthcare empire with synergies from all value chain coverage Fosun Pharmaceutical offers investors access to an integrated platform covering almost all subsectors along the healthcare value chain. For example, its manufacturing business distributes drugs through its distribution/hospitals channel. Its high-value/priced devices are sold at their hospitals. We believe it will continue to outperform the market with positive operating and financial synergies through:
1. Stable, growing pharmaceutical manufacturing business; 2. Expanding pharmaceutical distribution business with Sinopharm; 3. First mover advantage in private hospital industry with rapid expansion of network 4. Better product offerings in medical devices such as IVD and Da Vinci surgical robotic system Table 1: Fosun’s Fully Integrated Business Model
Fosun's Fully Integrated Business Covers Pharmaceutical Value Chain R&D and Manufacturing Channel End User Pharmaceutical Products Distribution Healthcare Services
• General hospitals: Yueyang Guang Gi, Suqian Zhongwu, Foshan Chan Metabolism, CV, CNS, Blood System, Owns 27.84% equity interest in Cheng Anti-Infective, Oncology, API etc. Sinopharm • Specialty hospital: Anhui Jimin • Premium Hospital United Family
Diagnostic products and Medical Medical devices distribution Pharmacy devices • Biochemical diagnosis Distribution through a variety of • Over 3000 retail pharmacies • Gene diagnosis partners like MAKO, Intuitive • Largest retail pharmacy chain by sales • Transfusion supplies surgical etc. in China Source: Company data, J.P. Morgan
Rapidly expanding hospital network offers ample room for growth Fosun was the pioneer of public hospital reform. It formed strategic cooperation with Chindex and entered China's premium private hospital market. Since then, Fosun has acquired five large hospitals both general and specialized. As of 1H2016, Fosun hospital revenue accounted for 11% of total revenue, up from merely Rmb11mn or 0.2% of total revenue in 2011. Now Fosun has a total of 3,078 beds in operation and more than 6,300 beds under construction, which will gradually be in operation by 2018. Fosun usually acquires these hospitals at much lower valuation as they are non-profitable public hospitals. It aims to expand the number of beds in operation by a CAGR of 20% in 2016 to 2018 , implying significant topline contribution.
6 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 2: Multiple Hospital Business Model Development
Hospital Business of Fosun Pharmaceutical Hospital category Description Strategic focus of Fosun Pharma, dedicated in providing healthcare services in 2nd and 3rd tier cities Actively exploring new models combining hospitals with rehabilitation/senior care General hospital centers . Taizhou Zanyang Project commenced construction with 800 beds in Phase I . Wenzhou Geriatric Hospital was established with 500 bed planned for 5 years Anhui Jimin Oncology Hospital Specialty Hospital Suqian Oncology Hospital (Under construction) Located in Beijing, Shanghai, Tianjin, Qingdao and Guangzhou Premium hospital Provides premium healthcare services to foreigners and local upper and middle (Chindex) class patients in China Invested in approximately 30% equity interest in Sovereign Medical Services, Inc., a day surgery center chain located in the U.S. Acquired approximately 9,73% of equity interest in Guahao.com Ltd. and set up strategic cooperation with Guahao.com Exploring New Models Led the A-round financing of “Mingyizhudao” to complete an closed O2O loop Invested in Hunan Jingren Healthcare Investment to enter the hemodialysis area Established Xing Shuang Jian Healthcare Investment for the integration of healthcare and senior care resources Source: Company data, J.P. Morgan
Table 3: The number of beds in private hospitals to grow at a CAGR of 16% in 2013-2020E, according to MOH (see our Healthcare service report)
# hospital beds per 1,000 2013 2020 CAGR (2013-20) people Public Hospital 3.04 3.3 1.20% Provincial Level 0.39 0.45 2.10% Municipal Level 0.79 0.9 1.90% County Level 1.26 1.8 5.20% Others 0.6 0.15 -18% Private hospitals 0.52 1.5 16.30% Source, MOH, J.P. Morgan
7 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 4: Fosun Sales Growth & Gross Profit By Business Segment RMB '000 2010A 2011A 2012A 2013A 2014A 1H15A 2H15A 1Q15A 2Q15A 3Q15A 4Q15A 2015A 1H16A 2H16E 1Q16A 2Q16A 3Q16E 4Q16E 2016E 2017E 2018E Segmental Revenue Total Sales 4,528,773 6,432,589 7,278,287 9,921,487 11,938,243 5,871,372 6,630,791 2,800,296 3,071,076 3,152,114 3,478,677 12,502,163 6,877,865 7,700,723 3,226,041 3,651,824 3,671,637 4,029,085 14,578,588 17,023,790 19,802,921 Core business 4,376,656 6,327,435 7,264,068 9,907,808 11,923,917 5,860,888 6,603,496 2,795,207 3,065,681 3,139,138 3,464,358 12,464,384 6,864,761 7,674,159 3,219,894 3,680,268 3,658,013 3,980,744 14,538,920 16,982,139 19,759,187 Pharmaceuticals manufacturing 2,837,930 3,830,824 4,633,015 6,523,708 7,265,332 4,077,237 4,765,426 1,925,002 2,152,235 2,265,365 2,500,061 8,842,663 4,796,657 5,283,979 2,249,857 2,546,800 2,582,516 2,701,462 10,080,636 11,491,925 13,100,794 Pharmaceutical distribution and retail 1,146,340 1,436,049 1,423,039 1,502,013 1,542,072 ------Diagnostic products and medical device 392,386 1,049,304 1,048,904 1,407,481 1,930,924 1,109,713 1,134,658 535,292 574,421 539,388 595,270 2,244,371 1,315,954 1,489,510 617,244 706,353 674,235 807,631 2,805,464 3,506,830 4,278,332 Healthcare services - 11,258 159,110 474,606 1,185,589 673,938 703,412 334,912 339,026 334,385 369,027 1,377,350 752,150 900,670 352,794 427,114 401,262 471,651 1,652,820 1,983,384 2,380,061 Others (non core) 152,117 105,154 14,219 13,679 14,326 10,484 27,295 5,089 5,395 12,975 14,320 37,779 13,104 26,564 6,146 (28,443) 13,624 48,341 39,668 41,651 43,734
Segmental Gross profit Total 1,544,173 2,441,389 3,151,483 4,378,118 5,219,674 2,941,907 3,252,215 1,357,368 1,584,539 1,578,072 1,674,143 6,194,122 3,649,290 3,536,506 1,639,746 2,077,038 1,811,383 1,725,123 7,185,796 8,372,227 9,715,565 Core business 1,526,756 2,435,035 3,148,018 4,371,808 5,285,801 2,945,937 3,241,447 1,360,154 1,585,783 1,552,223 1,689,223 6,187,384 3,653,761 3,524,960 1,571,156 2,118,006 1,808,953 1,680,606 7,178,721 8,364,799 9,707,765 Pharmaceuticals manufacturing 1,234,330 1,815,824 2,436,947 3,351,708 3,784,607 2,186,754 2,517,909 991,376 1,195,378 1,189,317 1,328,592 4,704,663 2,787,657 2,555,080 1,169,925 1,617,732 1,355,821 1,199,259 5,342,737 6,090,720 6,943,421 Pharmaceutical distribution and retail 115,640 197,149 217,042 231,013 235,320 ------Diagnostic products and medical device 176,786 419,204 442,918 668,481 968,887 562,957 571,415 278,352 284,605 272,623 298,792 1,134,371 647,954 770,010 311,973 343,624 340,778 421,588 1,417,964 1,772,455 2,162,395 Healthcare services - 2,858 51,111 120,606 296,987 196,227 152,123 90,426 105,800 90,284 61,839 348,350 218,150 199,870 89,257 156,651 112,353 59,759 418,020 501,624 601,949 Others (non core) 17,417 6,354 3,465 6,310 (66,127) (4,030) 10,768 (2,786) (1,244) 25,849 (15,081) 6,738 (4,471) 11,546 1,096 (40,968) 2,430 44,517 7,075 7,429 7,800
Segmental Gross Margin Total 34.1% 38.0% 43.3% 44.1% 43.7% 50.1% 49.0% 48.5% 51.6% 50.1% 48.1% 49.5% 53.1% 45.9% 50.8% 56.9% 49.3% 42.8% 49.3% 49.2% 49.1% Core business 34.9% 38.5% 43.3% 44.1% 44.3% 50.3% 49.1% 48.7% 51.7% 49.4% 48.8% 49.6% 53.2% 45.9% 48.8% 57.6% 49.5% 42.2% 49.4% 49.3% 49.1% Pharmaceuticals manufacturing 43.5% 47.4% 52.6% 51.4% 52.1% 53.6% 52.8% 51.5% 52.0% 52.5% 53.1% 53.2% 58.1% 48.4% 52.0% 63.5% 52.5% 44.4% 53.0% 53.0% 53.0% Pharmaceutical distribution and retail 10.1% 13.7% 15.3% 15.4% 15.3% NM NM NM NM Diagnostic products and medical device 45.1% 40.0% 42.2% 47.5% 50.2% 50.7% 50.4% 52.0% 50.5% 50.5% 50.2% 50.5% 49.2% 51.7% 50.5% 48.6% 50.5% 52.2% 50.5% 50.5% 50.5% Healthcare services NM 25.4% 32.1% 25.4% 25.0% 29.1% 21.6% 27.0% 25.3% 27.0% 16.8% 25.3% 29.0% 22.2% 25.3% 36.7% 28.0% 12.7% 25.3% 25.3% 25.3% Others (non core) 11.4% 6.0% 24.4% 46.1% -461.6% -38.4% 39.5% -54.8% -23.1% 10.0% -105.3% 17.8% -34.1% 43.5% 17.8% 144.0% 17.8% 92.1% 17.8% 17.8% 17.8%
Sales YoY growth Total Sales 18% 42% 13% 36% 20% 7% 3% 5% 8% 1% 5% 5% 17% 16% 15% 19% 16% 16% 17% 17% 16% Core business 19% 45% 15% 36% 20% 7% 3% 5% 8% 1% 5% 5% 17% 16% 15% 20% 17% 15% 17% 17% 16% Pharmaceuticals manufacturing 23% 35% 21% 41% 11% 22% 22% 19% 24% 19% 24% 22% 14% 11% 17% 18% 14% 8% 14% 14% 14% Pharmaceutical distribution and retail 9% 25% -1% 6% 3% -100% Diagnostic products and medical device 24% 167% 0% 34% 37% 34% 3% 34% 34% 30% 5% 16% 19% 31% 15% 23% 25% 36% 25% 25% 22% Healthcare services NM NM 1313% 198% 150% 22% 11% 26% 19% 24% 13% 16% 12% 28% 5% 26% 20% 28% 20% 20% 20% Others (non core) -12% -31% -86% -4% 5% 35% 316% 36% 34% 164% 324% 164% 25% -3% 21% -627% 5% 238% 5% 5% 5%
Source: Company data, J.P. Morgan estimates
8 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Increasing R&D investment with a focus on biologic/bio-similar products Fosun Pharma has invested heavily and established rich innovative drugs and bio- similar products pipelines, which we believe offer significant long term growth potential and is under-appreciated by many investors.
Fosun has set up dedicated teams in China and the US to develop small-molecule chemical drugs and large-molecule biologic products, such as monoclonal. In April 2014, it received clinical trial approval from the CFDA for the rituximab monoclonal antibody genetic drug.
Fosun has been also focusing on the R&D of large molecule biologic & biosimiliar drugs with great growth potential, in our view. For example, its JV Shanghai Chemo Wanbang Biopharm has three marketed products: rh-EPO (brand name: CLONEPO), r-streptokinase (brand name: CICLEADON®), and rh-interferon γ (brand name: CLONGAMMA®). Henlius Biotech is focused on biosimilar and bio betters (mAbs and recombinant proteins) for cancer and autoimmune diseases. Henlius’s rituximab biosimilar is under CFDA review for clinical trials to treat RA and lymphoma. Fosun has also filed an IND application for its trastuzumab biosimilar.
Furthermore, in 2015 Fosun Pharma, HOPU Investments, China Everbright Limited and WuXi PharmaTech jointly acquired Ambrx, a clinical-stage Biotechnology company, focused on discovering and developing optimized protein therapeutics with cutting edge site-specific bio-conjugates technology platform. In Jan 2015, it acquired approximately 35.23% equity interest in Genefirst Limited, a U.K. company principally engaged in developing and manufacturing molecular diagnostic products for infectious diseases and cancer.
In 1H16, Fosun spent RMB307mn in R&D, accounting for 4% of revenue and up 3% as compared to 1H15. Out of this RMB243mn was spent in pharmaceutical manufacturing and R&D, or 5% of total pharma sales. The main focus of Fosun in R&D is the development of small molecular innovative drugs, large-molecular biologics, high value generics and specialized formulation technology. Fosun obtained clonocal trial approval for 22 products in 1H16. Also, N-Acetyl Cysteine, Histidine hydrochloride APIs, Fasudil Hydrochloride APIs and thermopentinfor injection approved production approval.
Figure 5: Research period: proposal to clinical trial application
35 31 32 30 28 25 23 20 15 12 10 9 10 5 0 2009 2010 2011 2012 2013 2014 2015
Source: Company data, J.P. Morgan
9 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 6: Number of R&D projects
60 52 50
40
30
20 10 10 10
0 Chem 3 Chem 1-2 Bio 1-2
Source: Company data, J.P. Morgan
Figure 7: Increasing R&D as % of revenue
6% 5.4% 5.5% 5.0% 5.0% 4.7% 5% 4.2% 4.4% 4%
3%
2%
1%
0% 2012 2013 2014 2015 2016E 2017E 2018E
Source: Company data, J.P. Morgan estimates
As of now, Fosun has 172 pipeline drugs, generic drugs, biosimilars and vaccine projects. Fosun has also applied for 89 patents, including 6 U.S. patent applications, 4 European patent applications, 2 Japanese patent applications and 3 PCT applications, in respect of its pharmaceutical manufacturing and R&D segment. The pharmaceutical manufacturing and R&D segment of the Group obtained 15 licensed patents, including 9 invention patents (including 1 U.S. patent) in 2015. 13 APIs of Fosun also received GMP certifications from the U.S. FDA, EU, Ministry of Health, Labor and Welfare of Japan and Federal Ministry of Health of Germany.
Table 5: Fosun’s R&D Platform Features of R&D platform Monoclonal Antibody Bio similar Generic Drugs with High Barriers- Small Molecular innovative Drugs Drugs To-Entry First in China to adopt Structure-based drug design R&D of hard-to-copy generic advanced single-use (SBDD) platform adopted. drugs oriented by clinical technology for production, Such technology significantly requirements and market laying foundation for improved the accuracy of new demand production cost control drug discovery and reduced Taking advantage of the World-class QA and QC the R&D cost for new drugs leading position of branded control systems to ensure 24-hour R&D in laboratories in generic drugs to power the product quality both China and the U.S. organic growth of the First in China to obtain improves R&D efficiency company clinical trial approval under the guideline of biosimilars
Source: Company data, J.P. Morgan
10 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 6: Fosun’s Strong Pipeline Pipeline: Large molecular biopharmaceuticals Applied for Clinical trial Applied for Production Therapeutic area Drug name Category Pre-clinical Clinical trial clinical trial approval production approved CD20 Anti- Oncology Bio 2 body Her-2 Anti- Oncology Bio 2 Body VEGF Anti- Oncology Bio 2 Body EGFR Anti- Oncology Bio 2 Body EGFR Anti- Oncology Bio 2 Body TNFα Anti- Oncology Bio 2 Body
Pipeline: Large molecular biopharmaceuticals Applied for Clinical trial Applied for Production Therapeutic area Drug name Category Pre-clinical Clinical trial clinical trial approval production approved Metabolism and Liraglutide Bio 10 alimentary tract Metabolism and Insulin ly spro Bio 15 alimentary tract Metabolism and Insulin Bio 15 alimentary tract glargine
Metabolism and Biocon human License in alimentary tract insulin 30R Bio7
Metabolism and Biocon human License in alimentary tract insulin R Bio7
Metabolism and Biocon human License in alimentary tract insulin N Bio7
Pipeline: Small molecular Innovativ e drugs Applied for Clinical trial Applied for Production Therapeutic area Drug name Category Pre-clinical Clinical trial clinical trial approval production approved Metabolism and FC-109 Chem 1.1 alimentary tract Metabolism and FCN-005 Chem 1.1 alimentary tract Oncology FC-110 Chem 1.1 Oncology FC-102 Chem 1.1 Oncology FC-108 Chem 1.1 Oncology PA-824 Chem 1.1
11 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Pipeline: Generic drugs with high barriers-to-entry Applied for Clinical trial Applied for Production Therapeutic area Drug name Category Pre-clinical Clinical trial clinical trial approval production approved Venlafax ine Central nervous Hy drochloride ANDA system tablets Central nervous Agomelatin Chem 3.1 system Central nervous Lurasidone Chem 3.1 system hydrochloride Central nervous Memantine Chem 6 system Hy drochloride Central nervous Dulox etine ANDA system Anti-Infective Moxiflox acin Chem 3 +6 Piperacillin sodium Anti-Infective Chem 3+6 sulbactum sodium Latamox ef Anti-Infective Chem 6 sodium
Pipeline: Generic drugs with high barriers-to-entry Applied for Clinical trial Applied for Production Therapeutic area Drug name Category Pre-clinical Clinical trial clinical trial approval production approved Limaprost Cardiovascular Alfadex Chem 3.1 tablets Cardiovascular Clopidogrel Chem 6 Cardiovascular Valsartan Chem 6
Felodipine Cardiovascular sustained Chem 6 release tablets
Metoprolol succinate Cardiovascular ANDA sustained release tablets
Fasudil Cardiovascular hydrochloride Chem 6 injection
Source: Company data, J.P. Morgan
As of August, Fosun applied for an additional 37 patents in pharmaceutical manufacturing and R&D, out of which 13 were U.S. patent applications and 2 PCT applications. Also, 13 licence patents were granted to Fosun, all of which were invention patents. Novel drug furuitinib (or SAF-189s) has moved into Combined
12 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Phase 1-2 for ALK-positive NSCLC, while HLX07, bevacizumab, and cetuximab are cleared to commence human trials.
Table 7: 1H16 R&D Progress: Biopharmaceuticals and Innovative Chemical Drugs Clinical trials approved Therapeutic area Product name Category Indications Recombinant Humanized Anti-Her2 Gastric Oncology Bio 2 Monoclonal Antibody Injection Cancer HLX07(anti-EGFR humanized Colorectal Oncology Bio 1 monoclonal antibody) Injection cancer Recombinant Anti-VEGF Humanized Oncology Bio 2 NSCLC Monoclonal Antibody Injection Metabolism and Alimentary Tract Recombinant Human Insulin Injection Bio 15 Diabetes Oncology FCN-411(API and Capsules) Chem 1.1 Anti-tumor
Clinical trial applied Therapeutic area Product name Category Indications Anti- Anti-infective PA 824 tabltes Chem 1.1 tubercluosis
Source: Company data, J.P. Morgan
Table 8: 1H16 R&D progress: Generic drugs with high barriers to entry Clinical trials approved Therapeutic area Product name Category Indications Benign Dutasteride API & Duodart Sustained Metabolism and Alimentary Tract Chem 3+3.2 Prostate Release Capsule Hy pertrophy Metabolism and Alimentary Tract Canagliflozin API & Tablets Chem 3.1 Diabetes Rheumatoid Metabolism and Alimentary Tract Tofacitinib Citrate API & Tablets Chem 3.1 Arthritis Oncology Enzalutamide API & Soft Capsule Chem 3.1 Anti-tumor Psoriasis Metabolism and Alimentary Tract Apremilast API & Tablets Chem 3.1 Arthritis Quetiapine Fumarate Extended- Central Nervous System Chem 5 Schizophrenia Release Capsule
Source: Company data, J.P. Morgan
Proven track record of M&A capability We think one of Fosun’s competitive advantages is acquiring valuable assets at reasonable prices and integrate its platform (see table below). It continues to invest and explore new business models. For example, in 2015 it acquired 9.73% equity interest in Guahao.com accumulatively and set up strategic cooperation with the company. It also invested RMB36 million in Mingyizhudao as a lead investor for its A-round financing for 15% of its equity interest in October 2015. It plans to cooperate with China life and Taikang group, major insurance companies in China, to build an “integrated insurance+ service +pharmaceuticals” platform.
Recently Fosun announced the acquisition of 86% stake in Gland Pharma Ltd., an Indian developer and manufacturer of generic injectables, for USD 1.26bn. The acquisition is one of the biggest among any Indian company bought by a Chinese
13 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
company. The acquisition will increase the global presence of Fosun and fits right into its strategy of global expansion.
Gland Pharma, established in 1998, develops and manufacturers generic injectables in therapeutic areas of antibiotics, oncology and cardiology and distributes them in more than 78 countries. It is one of the largest global players in this market with revenue of $178mn in 2014 growing at a CAGR of 48% over 2010-14. The company owns 54 ANDA in the US along with another 84 ANDA in pipeline. In total its portfolio consists of 137 products. The company also has a strong R&D team which has enabled it to develop a strong pipeline of drugs in the categories like high value complex generics, oncology, ophthalmic and sterile injections. Also, out of $170mn CAPEX over the last 5 years, $150mn is spent on growth assets which are yet to deliver commercial sales, hence driving future sales growth.
Table 9: Gland pharma acquisition advantages
Advantages from Gland Pharma acquisition
Fosun Pharma has Gland Pharma brings Fosun Pharma’s ample Div erse chemical drug obtained FDA approval The interactions between stronger registration and Fosun Pharma could API resources, such as product lines, including for oral formulations. The Gland Pharma and marketing capabilities in transfer biosimilar R&D Heparin, Rocuronium ANDA projects of the two acquisition enables Fosun Pharma will regulated markets. The capabilities to Gland Bromide, and companies could Fosun Pharma with both accelerate the upgrading tw o companies may also Pharma to explore the Pemetrex ed will help optimize resources in oral and injectable of manufacturing prov ide support for sales biopharmaceutical market Gland Pharma to reduce R&D, international platforms, increasing capabilities for global in Chinese and Indian in India. cost, lift competitiveness registration and technical market occupancy in the competitions. markets. and raise profitability. ex pertise. global formulation market.
Source: Company data, J.P. Morgan Research
14 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 10: Fosun’s M&A Capability
Recent Mergers and Acquisitions of Fosun Pharmaceutical Date Target Company Target Industry
Jul-16 Gland Pharma Pharmaceutical Manufacturing 2016 Oct-15 Mingyizhudao Internet Healthcare Feb-15 Check Cap Novel Medical devices May-15 Ambrx Pharmaceutical R&D Apr-15 Scanadu Novel Medical devices 2015 Jan-15 Amerigen Pharmaceutical R&D Jan-15 Genefirst Personalised Diagnosis Jan-15 Guahao.com Internet Healthcare Dec-14 Eyre Pharmaceutical & HHL Pharmaceutical Manufacturing Jul-14 Miacom Diagnostics Personalised Diagnostics Jun-14 Sinopharm Hldg Medical Invest Professional Services
2014 Jun-14 Natures Sunshine Products Pharmaceutical Manufacturing Feb-14 Jinzhou Ahon Pharm Pharmaceutical Manufacturing Feb-14 Chindex Medical Healthcare Services Oct-13 Foshan Chancheng Cntrl Healthcare Services May-13 SD Bio Sensor Inc Medical Device Apr-13 Chindex Medical Medical Device 2013 Apr-13 Alma Laser Medical Device Mar-13 Saladax Personalised Diagnostics
Dec-12 Hunan Dongting Pharm Pharmaceutical Manufacturing 2012
Source: Company data
International expansion with differentiated strategies Different from other China healthcare companies with a focus on the domestic market, Fosun seeks to establish an international network to facilitate integration of its global resources – manufacturing overseas, international cooperation on R&D, product exports, and overseas M&A. In 2013, it marked its first step of globalization by acquiring Alma Laser, a high-end aesthetic laser surgery device company in Israel, which it recently announced it will spin off in an IPO.
It has also become the exclusive distributor for Intuitive Surgical in China for its Da Vinci surgical robotic system in China. Since then, it has continued to explore and invest overseas (see table below). It plans to grow an international sales network to facilitate the integration of its international pharmaceutical operations through drug production overseas, international R&D collaboration, cross-border R&D, and product exports.
Several Fosun production lines have already obtained certifications from the US FDA, EU EDQM, and WHO PO. Moreover, the company has several ANDAs pending with the US FDA, such as felodipine long-acting sustained release tablets to treat hypertension, and glipizide controlled release tablet for diabetes. We believe such international footprint offers Fosun distinct advantage, higher entry barriers & divarication of its healthcare platform. Up to now 13 of Fosun’s APIs have received GMP certifications from national health departments of developed nations like the US, EU and Japan.
15 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 11: Continuous investment internationally International Investments of Fosun pharmaceutical in 2015 Fosun Pharma, HOPU Inv estments, China Everbright Limited and WuXi PharmaTech jointly acquired Ambrx，a clinical-stage biotechnology company Ambrx focused on discovering and developing optimized protein therapeutics with cutting R&D edge site-specific bio-conjugates technology platform In Jan 2015, acquired additional class A-1preference shares representing Amerigen approx imately 24.1% of the total share capital of AMG, a U.S. developer and manufacturer of oral sustained-release and controlled-release generic drug In Jan 2015, acquired approximately 35.23% equity interest in Genefirst Limited, a Genefirst U.K. company principally engaged in developing and manufacturing molecular diagnostic products for infectious diseases and cancer Invested in approximately 20% equity interest in Saladax Biomedical, Inc., a U.S. Personalized Saladax company which is principally engaged in personalized medicine dose diagnostic Diagnosis tests Invested in approximately 37% equity interest in miacom Diagnostics GmbH, a Miacom diagnostics German enterprise principally engaged in developing low-cost, efficient and conv enient in-vitro diagnostic reagents A Silicon Valley based medtech company that is building a family of mobile medical products for consumers. B-round funding w as led by Fosun Pharma and Scanadu Tencent Holdings Limited, Fosun Pharma acquired approximately 4.76% equity Novel Medical interest for USD 5million. devices In Feb 2015, invested in a 6.18% equity interest in Check-cap, developer of the Check cap world's first preparation-free, non-inv asiv e, high-resolution imaging system for colorectal cancer screening Acquired 9.73% equity interest in Guahao.com accumulatively in 2015 and set up Guahao.com Internet strategic cooperation with the company Healthcare Invested RMB36 million in Mingyizhudao as a lead investor for its A-round Mingyizhudao financing for 15% of its equity interest in October 2015 Source: Company data, J.P. Morgan
16 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Investment Risks
Highly regulated healthcare service industry with rising competition & increasing acquisition cost Fosun will continue to consolidate the fragmented hospitals industry by acquiring general and/or specialty hospitals. In China, various regulatory approvals are required before a private company can build or acquire hospitals, although the government is encouraging private capital investment in the hospital segment. Furthermore, other companies such as pharmaceutical manufacturers, private equity firms and hospital management groups also chase hospitals acquisitions, which will increase M&A valuation multiples, in our view. In addition, Fosun could face rising risk as it develops international businesses and M&A, with greater exposure to different company and country cultures and regulatory regimes.
Price cut pressure on key products In recent years, the government has undertaken multiple rounds of price cuts on drugs in order to reduce the burden of healthcare insurance reimbursement plans. There are also ongoing rounds of provincial tenders of drugs, which will further reduce drug margins to very low levels.
Large capital needs and longer investment period for green-field hospitals Establishing green field hospitals or expansion of existing facilities require large capital investment and longer repayment period, e.g it requires at least Rmb600mn- 700mn for building a specialty hospital which will take 2-3 years to complete and another 3-4 years to break even. Thus, hospital services yields lower returns compared to other subsectors.
Uncertainty or delay of new product pipeline The R&D for new drugs takes a long time and involves execution risks going through the CFDA approval process. Pipeline failure almost always poses at least a temporary disruption because it deprives a company of a future potential revenue contributor. Therefore, the stock price may become volatile if there are setbacks or delay in its pipeline.
Discount as a holding company by investors Fosun has a complicated corporate structure with various subsidiaries. Some investors think it is a private equity company rather than a pharmaceutical company, thus think it should trade at a discount to other peers. Yet, we think it deserves re- rating as Fosun takes more steps to improve its product offerings with an increased R&D focus.
17 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Valuation
Our Dec-17 price target of HK$28.0 is based on a DCF valuation which assumes a market premium of 6.0% and a risk-free rate of 4.2% (yield on ten-year government notes in China). We assume a beta of 0.8 based on regression analysis performed by Bloomberg. Typically, pharmaceutical distribution is a stable business and leading US distributors have a similarly low beta of 0.8. Accordingly, we assume a WACC of 8.3%. We estimate free cash flow for Fosun until 2020 and assume a terminal growth rate of 4.0%.
Table 12: Fosun-DCF Analysis 2012 2013 2014A 2015A 2016E 2017E 2018E 2019E Terminal Cash flow estimates Sales 7,278,287 ###### 11,938,243 12,502,163 14,578,588 17,023,790 19,802,921 22,970,898 26,662,095 EBIT 593,545 ###### 1,192,431 1,473,459 1,828,488 2,250,371 2,750,451 3,061,391 3,242,660 NOPAT 514,212 ###### 1,039,667 1,254,452 1,554,215 1,912,815 2,337,883 2,602,182 2,756,261 Capex, net (1,160,597) ###### (1,119,437) (1,235,536) (969,000) (931,000) (742,000) (547,000) (547,000) Depreciation 234,308 ###### 459,310 535,087 462,205 502,749 537,009 553,408 552,896 Change in w orking capital (83,230) ###### (513,638) (267,439) 186,183 6,785 16,385 (38,818) 13,660 Free Cash Flow (495,307) ###### (134,098) 286,564 1,233,603 1,491,348 2,149,277 2,569,772 2,775,816
WACC calculation 0.1680% DCF Assumptions: Liabilities as a % of EV 25% Terminal grow th 4.0% WACC 8.3% Risk-free rate 4.2% Market risk 6.0% Enterprise NPV 50,196,694 Beta 0.80 + Net cash (debt), current (1,246,894) Cost of debt 6.0% - Minorities (Market value) (821,134) +/- Other items - Implied exit P/E multiple (x ) 13x = Equity value 48,128,666 / Number of shares 2,308,898 = Equity value per share (HK$) 28 Source: Company data, J.P. Morgan estimates
Table 13: Fosun –Sensitivity Analysis on WACC and Terminal Growth Rate Terminal growth rate 28.1 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% WACC 6.5% 31.6 35.8 41.5 49.5 61.6 81.7 121.8 7.0% 27.7 31.0 35.3 40.8 48.7 60.6 80.4 7.5% 24.7 27.3 30.5 34.7 40.3 48.0 59.6 8.3% 21.1 23.0 25.3 28.1 31.7 36.3 42.7 8.8% 19.3 20.8 22.6 24.9 27.6 31.2 35.7 9.3% 17.6 18.9 20.5 22.3 24.5 27.3 30.6 9.8% 16.2 17.4 18.7 20.2 21.9 24.1 26.8
Source: Source: J.P. Morgan estimates
18 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Financial Analysis
Revenue forecast Excluding the effect of disposal of four companies and new acquisition of Erye pharmaceutical, Fosun Pharma’s sales increased by 15% in 2015. We expect acceleration in sales growth of 16.6%, 16.8% and 16.3% in 2016-2018.
In 1H16, Fosun's revenue increased by 17.15% as compared to 1H15 to RMB6,937mn. Among its segments, Pharmaceutical manufacturing increased by 20% organically, the Diagnostics and medical devices increased by 14% and Healthcare services increased by 12%.
As of 1H16, the highest proportion (69.7%) of this revenue came from Pharmaceutical Manufacturing. With continued investment in R&D and 172 pipeline products, we expect revenue of this segment to grow by 14% in each year during 2016-18. The other sectors: Diagnostics products & medical devices and Healthcare services are expected to increase by 25% and 20% respectively in each year during 2016-18, per our estimates.
Figure 8: Sales revenue and growth rate 2012-2018E
Rmb Mn Sales YoY
25,000 36.3% 40% 35% 20,000 30%
15,000 20.3% 25% 16.6% 16.8% 16.3% 20% 13.1% 10,000 19,803 15% 17,024 14,579 11,938 12,502 10% 5,000 9,921 7,278 5% 4.7% 0 0% 2012 2013 2014 2015 2016E 2017E 2018E
Source: J.P. Morgan estimates, Company data.
19 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 9: Major Business Segments’ revenue
Pharmaceutical Manufacturing Healthcare services
Rmb Mn Diagnostics Products and Medical YoY 14,000 40% 36.3% 12,000 35% 30% 10,000 25% 8,000 20.3% 20% 13,101 6,000 16.6% 11,49216.8% 16.3% 10,081 4,278 15% 13.1% 3,507 4,000 8,843 7,265 2,805 10% 6,524 1,931 4,633 1,407 2,244 2,000 1,049 4.7% 5% 159 475 1,186 1,377 1,653 1,983 2,380 0 0% 2012 2013 2014 2015 2016E 2017E 2018E
Source: J.P. Morgan estimates, Company data
Gross Margin Expansion Cost of sales as a percentage of revenue fell significantly from 56.3% in 2014 to 50.5% in 2015. Cost of sales also shrunk by 6.11% during this period. This led to an improvement in gross margin to 49.5% in 2015, up from 43.7% in 2014. This was primarily because the group disposed of the low margin pharmaceutical distribution and retail business. In 1H16, the costs increased by 10%, while they decreased by 8% during the same period last year. Further, due to increased focus on cost cutting through internal integration led to a decrease of 18% in procurement costs through centralized procurement. Gross margin improved by 3% to 53.5% in 1H16 on fast growing of high margin products which we believe will continue.
Figure 10: Cost of sales and as % of total sales
Rmb Mn COGS % of Sales
12,000 56.7% 58% 56.3% 55.9% 57% 10,000 56% 55% 8,000 54% 53% 6,000 50.8% 50.9% 52% 50.7% 10,087 4,000 8,652 51% 6,719 7,393 50% 5,543 6,30850.5% 2,000 4,127 49% 48% 0 47% 2012 2013 2014 2015 2016E 2017E 2018E
Source: J.P. Morgan estimates, Company data
Cost Analysis SG & A as a proportion of sales increased from 33.7% in 2014 to 37.8% in 2015. The increase was due to the expansion of market and increased sales volume of major products. In 1H16, Selling and distribution costs increased to 24.4% as
20 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
compared to 21.8% in 1H15 and the Administrative expenses decreased to 9.6% as compared to 10.2% in 1H15. We expect the expense ratio to decrease to 36.8% in 2016, and then down to 36.1% in 2017 and 35.9% in 2018 on increasing of scale and operating leverage.
Figure 11: SG&A as % of total revenue
Rmb Mn SG&A SG&A as % of revenue
8,000 39% 7,000 36.8% 38% 37.8% 36.1% 6,000 35.9% 37% 35.1% 36% 5,000 35% 4,000 33.7% 32.9% 7,109 34% 3,000 6,146 5,365 33% 4,721 2,000 4,027 3,264 32% 2,558 1,000 31% 0 30% 2012 2013 2014 2015 2016E 2017E 2018E
Source: J.P. Morgan estimates, Company data
Operating margin increased from 10.0% in 2014 to 11.8% in 2015. In 1H16, the operating margin improved by 1.5pp to 14.5%, due to decrease SG&A and R&D costs as a % of revenue. We further forecast it to increase to 12.5% in 2016, 13.1% in 2017 and 13.2% in 2018. The improved margins are driven by faster growth in high margin products like Artisunate. EBIT also increased to Rmb 1,473mn in 2015, up by 24% from 2014. We further project EBIT growth to be 24%, 23% and 22% in 2016, 2017 and 2018.
Figure 12: EBIT and EBIT margin change by year
Rmb Mn EBIT EBIT Margin 13.1% 13.2% 3,000 12.5% 14% 11.2% 2,500 10.0% 12% 11.8% 10% 2,000 8.2% 8% 1,500 2,606 6% 1,000 2,227 1,821 4% 1,473 1,114 1,192 500 2% 594 0 0% 2012 2013 2014 2015 2016E 2017E 2018E
Source: J.P. Morgan estimates, Company data
21 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 13: GPM, EBITDA margin and Net Profit margin, 2012—2018E
Rmb Mn EBITDA Margin Net Margin Gross Margin 60.0%
50.0% 49.5% 49.3% 49.2% 49.1% 40.0% 43.3% 44.1% 43.7% 30.0% 21.5% 19.7% 17.7% 19.2% 18.8% 18.3% 20.0% 16.0%
10.0% 15.5% 14.8% 13.4% 14.5% 15.1% 15.3% 11.6% 0.0% 2012 2013 2014 2015 2016E 2017E 2018E
Source: J.P. Morgan estimates, Company data
Balance sheet and cash flow Declining capex and healthy Cash Flow Fosun’s capex as a % of revenue increased to 9.9% in the 2015, up from 9.4% in 2014. In 1H16, Fosun had a capital expenditure worth RMB888mn up from RMB476mn in 1H15. This was primarily due to a significant increase in the capex in pharmaceutical manufacturing and R&D segment. We expect this number to go down further to 6.6%, 5.5% and 3.7% in 2016, 2017 and 2018.
Fosun also has a healthy operating cash flow of Rmb 1,354mn in 2015, almost double of the 2014 amount. In 1H16, the operating cash flow was RMB936mn as compared to RMB677mn in 1H15. The cash flow is expected to grow to Rmb 3,494mn in 2016, Rmb 3,158mn in 2017 and Rmb 3,811mn in 2018. Fosun also has a health cash and equivalents of Rmb 4,028 mn in 2015. This number is expected to increase in the next period to Rmb5,924mn in 2016, Rmb 9,117mn in 2017 and Rmb 12,858mn in 2018.
Figure 14: Capex and Capex as % of revenue
Rmb Mn CAPEX CAPEX as % of Revenue
1,400 15.9% 18% 1,200 16% 14% 1,000 10.5% 9.4% 12% 800 10% 9.9% 6.6% 600 1,161 1,236 5.5% 8% 1,040 1,119 969 931 3.7% 6% 400 742 4% 200 2% 0 0% 2012 2013 2014 2015 2016E 2017E 2018E
Source: J.P. Morgan estimates, Company data
22 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Figure 15: Operating Cash Flow
Rmb Mn Operating Cash Flow
4,500 4,000 3,500 3,000 2,500 2,000 3,494 3,811 1,500 3,158 1,000 1,354 500 582 166 687 0 2012 2013 2014 2015 2016E 2017E 2018E
Source: J.P. Morgan estimates, Company data
23 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Company Overview
Shanghai Fosun Pharmaceutical is a leading healthcare company in China with business operations covering most of the important segments in healthcare industry value chain. It is engaged in R&D, manufacture, distribution and retailing of healthcare products, including pharmaceuticals, diagnostic products, and medical devices. Fosun has formed a relatively complete product portfolio in the six major therapeutic areas: cardiovascular system, metabolism and alimentary system, central nervous system, blood system, anti-infection and anti-tumor, which are areas with the greatest potential to grow in China’s pharmaceutical market. In 2015, there were 19 formulation products and series of the group that each recorded revenue of over RMB100 million.
Fosun distributes products in the domestic and overseas markets. The company co- founded and owns about 32.1% of Sinopharm, the largest medical product distributor in China. The company has good knack for identifying potential M&A targets. It has made itself into the Top 5 pharmaceutical companies in China by a series of strategic acquisitions and we think will continue to strengthen its position in the future.
Business Segments Fosun conducts its business primarily through the following three business segments: Pharmaceutical manufacturing and R&D, Healthcare services, Manufacturing & Distribution of medical diagnosis and medical devices.
Pharmaceutical manufacturing Pharmaceutical manufacturing is the core business of Fosun Pharma’s strategic development. It is one of the top five domestic pharmaceutical companies in China currently, according to IMS. It mainly produces innovative drugs, first-to-market generic drugs and differentiated branded generic drugs for the six largest and fastest growing therapeutic areas in China, i.e., cardiovascular system, metabolism and alimentary system, central nervous system, blood system, anti-infection and anti- tumor. It has 148 GMP certified production lines in 18 plants in Shanghai, Chongqing, Sichuan, Hebei, Guangxi, Jiangsu and Liaoning.
This sector earned revenue of RMB 8,843 million in 2015, representing a Y-O-Y increase of 21.7% and accounted for 70.7% of the group’s revenue in 2015 as compared to 60.9% in 2014. In 1H16, the segment generated revenue worth RMB4,797mn, accounting for 69.7% of the overall revenue and an increase of 17% YoY. This was primarily due to a surprising 48% increase in the revenue from Cardiovascular system drugs portfolio. Other therapeutic areas like anti-infection, central nervous system and anti-tumor increased by 31%, 26% and 22% respectively. This represents that Fosun is becoming more heavily reliant on Pharmaceutical sales. In 2015, the sales of the Group’s major products in therapeutic areas such as cardiovascular system, metabolism and alimentary system, anti-infection and anti- tumor maintained rapid growth, with sales of anti-malaria medicines in the anti- infection therapeutic areas such as artesunate series increased by approximately 126%.
24 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Table 14: Sales of Major Products Line 2015
Sales of Hospital prescription drugs in 2015 Metabolism & Central Nervous Cardiovascular Anti-infective Blood System Oncology alimentary tract system
Sales of major products in therapeutic areas (RMB 1,740 847 788 4,594 246 225 Million)
YoY Growth 14.8% 29.4% -11.6% 26.2% 0.0% 21.3% % to pharmaceutical 19.5% 9.5% 8.8% 17.8% 2.8% 2.5% manufacturing revenue
Source: Company data
Table 15: Main products portfolio
Major Products of Fosun Pharmaceuticals Therapeutic Products Chemical name 2015 revenue 2014 revenue areas (RMB million) (RMB million) Metabolism and Atomolan Reduced glutathione/liv er dieases 713 639 alimentary tract Wan Su lin Animal insuline/diabetes 265 259 EPO Erythropoietin 250 179 Wan SU Ping Glimepiride/ty pe 2 diabetes 185 158 You Li Tong Gout 117 50 Lu Hui Constipation 111 106 Mo Luo Dan TCM/chronic astrophic gastristris 100 125 and gastrulae Cardiov ascular You Di Er PGE1/Alprostadil Dried emulsion for 313 184 injection Xin Xian An Meglumine adenosine 165 141 cyclophosphate/ heart failure Heparin Series Anticoagulant, anti-thrombotic 119 125 Ke Yuan Calcium Dobesilate, 106 91 mocricirculation improv ement Nervous system Ao De Jin Deproteinized calf serum 560 671 injection/cerebral circulation improv ement
Qi Wei Quetiapine Fumarate, the treatment 229 220 of schizophrenia Anti-Infectiv e Cefmetazole series Cefmetazole 445 345 sodium/microorganism-caused infections
Shaduolika Yanhuning/v iral pneumonia 452 408 Artesunate series Various malarial diseases 357 201 Yi An Series Enthambutol/tuberculosis 162 147 Lifu series Rifampicin/tuberculosis & enterococcal infections Blood sy stem Bang Ting Hemo-coagulase injection/hemostatic 246 246 purposes Oncology XI Huang (TCM) Tumor auxiliary medicine 120 104 Source: Company data
Medical Diagnosis and Medical Devices Fosun Pharma is a leading manufacturer and supplier of biochemical diagnostic products in China. Fosun produces more than 14 series and 130 diagnostic products. It is the most prolific developer and manufacturer of in-vitro diagnostic products due to its superior brands namely, “Long March”, “Biofosun” and “Yaneng”. Chindex Medical Limited (joint venture between Fosun Pharma and Chindex international
25 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Inc.) produces and sells blood transfusion devices and surgical consumables, and premium imported medical equipment.
Fosun is also the single largest shareholder of Saladax Biomedical, which has exclusive distribution and manufacturing rights in China. Alma Lasers, a holding company of Fosun Pharma, is a leading global medical and aesthetic device manufacturer with business covering more than 60 countries including US, Germany and Brazil etc. It has a 15% market share in global high-end aesthetic energy based device segment and is the market leader in China.
In 1H16, the revenue from this segment increased by 19% to RMB1,315mn. This increase was due to a 31% increase in the revenue from distribution of medical devices and medical diagnosis. This increase was in part due to an increase in the sales volume of Da Vinci surgical robots. Also, the revenue from Alma Lasers increased by 16%. Revenue from Medical Diagnosis and medical devices amounted to RMB 1,716 million, a Y-O-Y increase of 14.7% and accounting for 17.95% of overall sales, up from 16.2% in the year before. The increase in revenue of distribution business was mainly due to an increase in sales of consumables brought by the accelerated sales of Da Vinci surgical robotic system and the increased volume of surgery.
Healthcare Services Fosun owns and operates a series of high-end hospitals in Tier I and Tier II cities. It entered the healthcare service market in 2010 by acquiring 18.5% stake in Chindex International Inc. which owned United Family healthcare, an International and premium healthcare service brand. The group has also invested in Anhui Jimin Cancer Hospital, Guangji Hospital, Zhongwu Hospital and Chacheng Hospital to enter the specialist and integrated healthcare market. Further, in 2015, Qingdao United Family Hospital commenced operations and in pursuit of overseas opportunities acquired 30% equity interest in Sovereign Medical services Inc., a day surgery center, in United States.
In 1H16, revenue from this segment increased by 12% to RMB752mn. The number of beds in the 5 biggest hospitals of the group increased to 3,018. Revenue from Healthcare sector amounted to RMB 1,377 million representing a Y-O-Y increase of 16.1% and accounting for 11.0% of the overall revenue up from 9.93% in the previous year. Healthcare service sector is projected to bring in sizeable profits for the group in the future, so being one of the first entrants of this market; Fosun is well positioned to take advantage of the position.
26 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
SWOT Analysis
Strengths Weaknesses
• It owns 30% of Sinopharm, which provides it access to China’s • Lack of outstanding proprietary products with high gross margins largest distribution network • Pharmaceutical manufacturing business highly dependent on the • Strong R&D team with a staff of 900, which applied for 89 group’s capability to win tenders from hospitals patents in 2015 alone out of which 15 were granted • Limited control over the operations of subsidiaries in which Fosun • Market leading position in pharmaceutical manufacturing does not own majority stake focusing on the largest and fastest growing therapeutic areas • The growth in Net Sales has slowed down from double digits to • It is the market leader in glucose control market single digit in 2015
• First mover advantage in hospital service space and full coverage of healthcare value-chain may diversify overall business risks
• Gross and Operating margins have been increasing consistently, and are now at their all-time high of 49.5% & 11.8% respectively
• Despite the increase in sales, the cost of goods sold has decreased by 6% implying improved productivity and economies of scale. Opportunities Threats
• Approval and launch of human insulin • Difficulty in exiting minority investments due to unfavorable market conditions • Huge demand explosion to happen in Chinese generic and prescription drug market • Failure to gain from any future M&A in terms of yield synergies and growth • Expansion of product portfolio reach to international markets to develop new sales channels • Unfavorable government policies on prices of healthcare products and services • Aging Chinese population, increased healthcare spending and increase in per capita disposable income will spur growth in • Being a drug manufacturer, quality of raw material and finished Chinese healthcare sector in the coming years drug is a huge issue. Any potential health issue can lead to penalties and brand reputation damage • Healthcare services market is poised to grow by the highest rate in the Chinese Healthcare sector. So Fosun should strengthen its • Raw materials constitute a major portion of total cost for already dominant position through expansion pharmaceutical (around 65-70%), so any fluctuation in price of raw materials could have a huge impact on the bottom line, since the drug prices are already capped by the government
• Huge Chinese pharmaceutical market size will attract international players which will intensify the already stiff market competition Source: J.P. Morgan
27 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Shareholding Structure
Fosun International owns 48.1% of Fosun Pharmaceutical Group’s A-shares outstanding, with Fosun International’s Chairman GUO Guangchang exerting ultimate control of the Group. Regarding the H shares, Capital Group Companies Inc. is the largest shareholder with 12.0% of the outstanding shares. Here is a list of Top 10 majority shareholders of the company:
Holding Entity Share Type % of shares Fosun International A Shares 48.18% Norges Bank investment Management H Shares 13.19% Blackrock H Shares 5.22% JP Morgan Chase & Co. H Shares 4.93% Nordea Bank AB H Shares 4.89% Vanguard Group Inc. H Shares 3.95% Bosera Asset Management Co. Ltd H Shares 2.99% IP Comcept Luxembourg H Shares 0.90% Govt. Pension Investment H Shares 0.59% Frostrow Capital LLP H Shares 0.52%
Source: Company data, Bloomberg
28 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Company History
• Company was founded 1994
• Fosun industrial's A shares were listed on Shanghai Stock exchange 1998
• Fosun industrial was regarded as a hightech enterprise 1999 • Acquired Fosun longMarch
• Acquired 51% stake in Yao Pharma and an additional 41% stake in Fosun LongMarch 2002
• Jointly established Sinopharm with CNPGC 2003
• Acquired 94.48% stake in Guilin Pharma and 75.2% in Wanbang Pharma 2004
• Acquired 51% stake in Shine Star 2006
• Established Joint venture Fochon Pharma 2009
• Acquired 18.8% stake in Chindex, 51% in Yaneng, 70% in Shenyang Hongqi. 60.68% in Moluodan pharma 2010 • Established Chindex medical limited Joint venture with Chindex
• Acquired 50% in Golden Elephant Pharmacy, 75% in Dallan Aleph, 70% in Aohong Pharma 2011 and 70% in Jimin Cancer hospital
• Acquired 51% stake in Guangji hospital 2012 • Fosun Pharma was listed on Hong kong Stock Exchange
• Acquired Guangzhou Nanyang Tumour hospital and Alma Lasers Ltd 2013 • Acquired Chancheng hospital
• Fosun Pharma was included in MSCi China Index 2014 • Acquired 65% stake in Erye Pharma
• Partenered with Guahao.com to explore opportunities via O2O business model 2015
Source: Company
29 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Key Management Profiles
Mr. Chen Qiyu, Executive Director and Chairman of the Board Mr. Chen joined the Group in April 1994 and was appointed as a Director on May 2005. Mr. Chen is an executive director and vice president of Fosun International Limited, a non-executive director of Sinopharm Group Co. Ltd. Mr. Chen is the chairman of China Medical Pharmaceutical Material Association, the vice president of China Pharmaceutical Industry Research and Development Association, vice president of the China Pharmaceutical Industry Association and chairman of the Shanghai Biopharmaceutical Industry Association. Mr. Yao Fang, Executive Director and Vice Chairman of the Board Mr. Yao joined the Group in April 2010 and was appointed as a Director of the Company on June 2010. Mr. Yao is currently a chief supervisor of Sinopharm Group Co. Ltd. Mr. Yao is a vice chairman of the Shanghai Pharmaceutical Industry Association since June 2010. Mr. Guo Guangchang, Non-executive Director Mr. Guo joined the Group in January 1994 and was appointed as a Director of the Company on May 1995. Mr. Guo was the chairman of the Board of the Company from July 1995 to October 2007. Mr. Guo is the executive director and chairman of Fosun International Limited. Mr. Guo is the chairman of the Zhejiang Chamber of Commerce in Shanghai, a deputy to the 10th and 11th National People’s Congress of the PRC and a member of the 9th and 12th National Committee of the Chinese People’s Political Consultative Conference. Mr. Wang Qunbin, Non-executive Director Mr. Wang joined the Group in January 1994, and was appointed as a Director of the Company on May 1995. Mr. Wang served as the Company’s Director and general manager from 1995 to 2007 and was the chairman of the Board of the Company from October 2007 to June 2010. Currently, Mr. Wang is an executive director and president of Fosun International Limited, a non-executive director of Sinopharm Group Co. Ltd. Mr. Wang is currently the vice chairman of China Chamber of International Commerce. Ms. Kang, Non-executive Director Ms. Kang was appointed as the Company’s non-executive Director on June 2013. Ms. Kang currently is the vice president and chief human resources officer of Shanghai Fosun High Technology (Group) Company Limited since December 2014. Mr. Wang Can, Independent non-executive Director Mr. Wang was appointed as the Company’s non-executive Director on June 2016. Mr. Wang is currently the chief financial officer of Fosun International Limited. Mr. Wang is a non-practicing member of the China Institute of Certified Public Accountants. Mr. Cao Huimin, Independent non-executive Director Mr. Cao was appointed as the Company’s independent non-executive Director on June 2013. Mr. Cao is an independent director of Shanghai Bailian Group Co., Ltd., Shanghai Industrial Development Co., Ltd., an independent director of Shanghai HAND Enterprise Solution Company Ltd. and Shanghai Flyco Electrical Appliance Co., Ltd.
30 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Investment Thesis, Valuation and Risks
Fosun Pharmaceutical -H (Overweight; Price Target: HK$28.00) Investment Thesis Fosun is a leading Chinese healthcare company with business operations covering most of the important segments in the healthcare industry value chain. The Group has expanded rapidly through organic growth, M&A and strategic investments. The company owns about 30% of Sinopharm, which forms part of Fosun’s core valuation. It has recently vastly expanded its manufacturing operations through aggressive acquisitions, including Jinzhou Aohong, which produces Aodejin, a top-5 bestselling prescription drug in China. It has also aggressively been amassing hospital services assets, which allows the company to participate in a potentially very lucrative space.
Valuation Our Dec-17 price target of HK$28.0 is based on a DCF valuation which assumes a market premium of 6.0% and a risk-free rate of 4.2% (yield on ten-year government notes in China). We assume a beta of 1.0 based on regression analysis performed by Bloomberg. Accordingly, we assume a WACC of 8.3%. We estimate free cash flow for Fosun until 2020 and assume a terminal growth rate of 4.0%.
Risks to Rating and Price Target Key risks to our rating and PT include 1) unfavorable government policies on prices of healthcare products and services, 2) failure to gain from any future M&A transactions in terms of yield synergies and growth, 3) unexpected delays in the approval and launch of new products, and 5) penetrating private healthcare services and realizing target returns proving exceedingly difficult.
31 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
Fosun Pharmaceutical - H: Summary of Financials Income Statement Cash flow statement Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Revenues 11,938 12,502 14,579 17,024 19,803 EBIT 1,192 1,473 1,821 2,227 2,606 % change Y/Y 20.3% 4.7% 16.6% 16.8% 16.3% Depr. & amortization 563 657 584 625 659 Gross Profit 5,220 6,194 7,186 8,372 9,716 Change in working capital (514) (267) 269 (47) 106 % change Y/Y 19.2% 18.7% 16.0% 16.5% 16.0% Taxes (399) (334) (577) (659) (746) EBITDA 1,755 2,131 2,405 2,852 3,266 Cash flow from operations 687 1,354 3,494 3,158 3,811 % change Y/Y 14.4% 21.4% 12.9% 18.6% 14.5% EBIT 1,192 1,473 1,821 2,227 2,606 Capex (1,119) (1,236) (969) (931) (742) % change Y/Y 7.0% 23.6% 23.6% 22.3% 17.1% Net Interest (345) (414) (418) (391) (378) EBIT Margin 10.0% 11.8% 12.5% 13.1% 13.2% Other 1,312 948 404 454 498 Net Interest (345) (414) (418) (391) (378) Free cash flow (5) 492 2,880 2,560 3,391 Earnings before tax 2,718 3,372 3,845 4,393 4,973 % change Y/Y 17.5% 24.1% 14.0% 14.2% 13.2% Equity raised/(repaid) 1,466 116 0 0 0 Tax (348) (501) (577) (659) (746) Debt raised/(repaid) 2,965 1,960 1,960 1,960 1,960 as % of EBT 12.8% 14.9% 15.0% 15.0% 15.0% Other (1,945) (871) (607) (607) (607) Net income (reported) 2,113 2,460 2,801 3,200 3,623 Dividends paid (623) (654) (843) (963) (1,090) % change Y/Y 33.5% 16.4% 13.9% 14.2% 13.2% Beginning cash 1,272 0 0 0 0 Shares outstanding 2,295 2,312 2,309 2,309 2,309 Ending cash 3,696 4,029 6,085 9,157 12,987 EPS (reported) 0.92 1.06 1.21 1.39 1.57 DPS 0.34 0.39 0.44 0.51 0.57 % change Y/Y 30.3% 15.6% 14.0% 14.2% 13.2% Balance sheet Ratio Analysis Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Rmb in millions, year end Dec FY14 FY15 FY16E FY17E FY18E Cash and cash equivalents 3,696 4,029 6,085 9,157 12,987 Gross margin 43.7% 49.5% 49.3% 49.2% 49.1% Accounts receivable 1,778 2,147 2,407 2,910 3,275 EBITDA margin 14.7% 17.0% 16.5% 16.8% 16.5% Inventories 1,605 1,649 1,272 1,012 748 Operating margin 10.0% 11.8% 12.5% 13.1% 13.2% Others 1,586 501 501 501 501 Net margin 17.7% 19.7% 19.2% 18.8% 18.3% Current assets 8,664 8,325 10,265 13,581 17,511 Sales per share growth 17.5% 4.0% 16.7% 16.8% 16.3% LT investments 121 225 225 225 225 Sales growth 20.3% 4.7% 16.6% 16.8% 16.3% Net fixed assets 5,695 5,778 6,284 6,713 6,918 Net profit growth 33.5% 16.4% 13.9% 14.2% 13.2% Total Assets 35,279 38,145 41,451 46,212 51,504 EPS growth 30.3% 15.6% 14.0% 14.2% 13.2% Liabilities Interest coverage (x) 5.1 5.1 5.8 7.3 8.6 Short-term loans 4,939 7,323 7,323 7,323 7,323 Payables 875 1,049 1,220 1,435 1,660 Others 3,723 2,567 2,567 2,567 2,567 Net debt to equity 26.8% 33.3% 20.3% 14.1% 6.2% Total current liabilities 9,537 10,939 11,110 11,325 11,551 Working Capital to Sales NM NM NM 0.1 0.3 Long-term debt 3,857 3,572 3,572 5,532 7,492 Sales/assets 0.4 0.3 0.4 0.4 0.4 Other liabilities 2,839 3,021 3,021 3,021 3,021 Assets/equity 2.0 2.1 2.0 2.0 2.0 Total Liabilities 16,233 17,532 17,703 19,879 22,064 ROE 13.2% 14.2% 14.4% 14.6% 14.9% Shareholders' equity 16,618 18,125 20,823 23,060 25,592 ROCE 4.5% 4.6% 5.1% 5.6% 5.8% BVPS 7.24 7.84 9.02 9.99 11.08 Source: Company reports and J.P. Morgan estimates.
32 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
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Fosun Pharmaceutical - H (2196.HK, 2196 HK) Price Chart
55
44
OW HK$17 OW HK$22.5OW HK$33 OW HK$35.8 NR Date Rating Share Price Price Target 33 (HK$) (HK$) Price(HK$) 03-Dec-12 OW 11.20 17.00 31-Oct-13 OW 17.98 22.50 22 27-Mar-14 OW 26.70 33.00 10-Nov-14 OW 26.15 35.80 11 14-Aug-15 NR 22.60 --
0 Oct Jul Apr Jan Oct Jul 12 13 14 15 15 16
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Dec 03, 2012.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
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34 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
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35 Isabella Y. Zhao, CFA Asia Pacific Equity Research (852) 2800-8534 07 September 2016 [email protected]
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"Other Disclosures" last revised July 9, 2016. Copyright 2016 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P
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